Coronavirus fear has raised the risk of a recession and a bear market for stocks according to Ed Yardeni of Yardeni Research, written in Barron’s online article posted on February 27th.1
The market witnessed a brutal two-day selloff on Monday and Tuesday, February 24 and 25th with the DOW shedding nearly 2,000 points. The following day the market initially rallied back gaining over 400 points at one time only to see selling pressure late in the afternoon ultimately causing the DOW to drop over 120 points. The NASDAQ did manage to hold on with a slight gain for the day gaining around 30 points. Thursday, we witnessed another heavy 1000-point downfall in the DOW due to continuing Coronavirus scares.2
Yardini considers the impact of the virus on global health and the world economy to be no more dangerous than previous outbreaks as SARS in 2003 and the MERS outbreak in 2012.1 The year of the SARS outbreak the market posted a 10% return, highlighted by a spring-like bounce back in equities once the virus scares dwindled.
President Trump, while speaking to the nation on Wednesday evening pointed out that many more people succumb to the common flu every year than the Coronavirus. This winter over 25,000 died in our country alone with the flu.3 Yardeni notes that about 80% of the cases of the Coronavirus are said to be mild.1 However, with a mortality rate between 2% and 4% in the Hubei province, and 0.7% in other parts of China. The Coronavirus is deadlier than the common flu with a mortality of about .01%.4 Jeff Gundlach, Wall Street "bond king" and Double Line Capital CEO, said that part of the stock market meltdown can also be attributed to the rise of Bernie Sanders as the candidate most likely to gain the Democratic nomination for President.5 Some people believe Bernie’s policies may negatively affect the market.
Even though I have no way of predicting the immediate future for the market. I do have nearly 40 years’ experience in the markets, and I’ve been through many of these “perfect storms”. Stock markets do go up and down, that is why the risk we take investing in equity usually generates better returns than more stable fixed-income investments. Many investors back in 2008 sold out of the market when the DOW dropped to 6,500 from 13,000, never to return and watched from the sidelines. The following 12 years climbed to a record high of 30,000! The current PE ratio of the S&P 500 (22.44) reflects that of September 2019.6 Preceding that we saw over a 10% gain for the rest of the year. Even with this recent decline, the DOW is trading at the same level as it was back in November of last year.7
Tom Porcelli, chief U.S. economist at RBC Capital Markets, “acknowledges it is difficult to trust Chinese data, but points out that the infection rate outside of Wuhan is incredibly low. The Guangdong region, with a population of 110 million, has an incredibly low 0.001% infection rate.”8
We at RMR are here to speak to you about your concerns. Please call us at any time to review your accounts and make adjustments based on your feelings regarding this period of high uncertainty.
Head of RMR’s Investment Committee
1 Barron’s. https://www.barrons.com/articles/the-fear-is-worse-for-markets-than-coronavirus-says-ed-yardeni-51582730427. Publication date February 26, 2020. Accessed February 27, 2020.
2 Bloomberg https://www.bloomberg.com/
3 Washington Post https://www.washingtonpost.com/health/time-for-a-reality-check-america-the-flu-is-a-much-bigger-threat-than-coronavirus-for- now/2020/01/31/46a15166-4444-11ea-b5fc-eefa848cde99_story.html Publication date February 1, 2020. Accessed February 27, 2020.
4 Stat News https://www.statnews.com/2020/02/25/new-data-from-china-buttress-fears-about-high-coronavirus-fatality-rate-who-expert-says/ Publication date February 25, 2020. Accessed February 27, 2020
5 Buisness Insider. Markets Insider. https://markets.businessinsider.com/news/stocks/stock-market-outlook-bernie-sanders-blamed-coronavirus-market-drop-gundlach-2020-2- 1028942933 Publication date February 26, 2020. Accessed February 27, 2020
6 Multpl https://www.multpl.com/s-p-500-pe-ratio/table/by-month Updated February 28, 2020. Accessed February 28, 2020
7 Yahoo Finance - https://finance.yahoo.com/ February 28, 2020. Accessed February 28, 2020
8 Market Watch -https://www.marketwatch.com/story/major-bank-economist-says-the-coronavirus-market-reaction-boggles-the-mind-2020-02-28 February 28, 2020. Accessed February 28, 2020